The Developmental State as an Agent of Change

The need to adopt radical new economic policies that are more aligned to the emerging realities of the post hyper-globalized world has been part of the political discourse for more than a decade now. Unfortunately this is all that it has been: a lot of hype but very little actual action to show for it

It is most unfortunate that yet another deplorable incident has distracted attention from what should surely have been an urgent priority following the celebrations of the 50th anniversary of independence and the forthcoming presentation of the next budget for fiscal year 2018-19: How does government propose to leverage the traditional tools at its disposal as well as innovative and imaginative instruments to present a coherent set of economic policies which will boost the growth trajectory of the country for the next fiscal year and beyond?

“The extreme levels of inequality of income and wealth (it has been estimated that 1% of the world population captured 80% of the wealth created in 2016) are now generally agreed to be intolerable and the root cause of much of the mayhem. From Pope Francis to Christine Lagarde, words of caution and warning have been issued. So much so that the IMF Fiscal Monitor of October 2017 actually recommends raising taxes in a progressive manner in order to reduce the excessive inequality of income and wealth…”

The need to adopt radical new economic policies that are more aligned to the emerging realities of the post hyper-globalized world has been part of the political discourse for more than a decade now. Unfortunately this is all that it has been: a lot of hype but very little actual action to show for it. This is why after one decade of a government that was in power on the credo of “democratization of the economy” the process of economic wealth and income concentration has actually accelerated leading to a level never witnessed during our 50 years of independence. The movement of the Gini Coefficient which measures the level of inequality of income in the country has actually reversed during the same period.

According to a World Bank study, the contribution of the primary sector to the national economy has gone from 23% to 6% between 1976 and 2010, while the share of secondary activities has increased from 23% to 28%. The tertiary sector which comprises Tourism and Financial Services has gone up to nearly 70% of Gross Domestic Product. It is this evolution which has underpinned the progressive transformation of Mauritius from a developing country status to a middle-income economy and sadly into what looks more and more like the proverbial trap (middle income trap) in which we have been stagnating ever since.

The Developmental State Paradigm

It is striking how this period (1976-2010) can be almost neatly divided into two distinct phases: 1976 to 2000 being the first, and 2000 to 2010 the second. The first phase of almost a quarter of a century was characterized by an economic model which can be described as the developmental state. This is indeed the phase of our economic development when government was actively involved in the crafting of the economic trajectory of the country through the formulation of a successful industrial policy accompanied with fiscal incentives and other benefits for investors.

The late twentieth century also witnessed the setting up of a legal and fiscal framework that served as the launching pad for the Financial Services industry in the country. Institutions such as the State Bank of Mauritius and State Insurance Company (SICOM), the State Investment Corporation and the State Trading Corporation were set up with a clear objective of creating competition and providing wider choice for the Mauritian public in areas hitherto dominated by quasi monopolistic institutions of the private sector.

It is quite remarkable how this first phase of our socio-economic development witnessed an increasingly larger share of the national income going to wage and salary earners. This phase was also marked by rapid social mobility and the emergence of a large middle class and, to a lesser extent, the widening of the entrepreneurial class albeit mostly limited to small and medium enterprises.

There Is No Alternative (TINA)

At the turn of the century, the external environment did deteriorate substantially as the price of oil peaked and under pressure from the WTO our cosy trade relationship with the European Union started unwinding while the end of the Sugar Protocol and preferential access to the EU was programmed. It is in the response to these external shocks that the famous TINA (There Is No Alternative) policies became legion. The whole scenario was to change radically. Ronald Reagan and Margaret Thatcher had made their mark and globalization became the privileged vehicle for implementation of the new dominant neoliberal ideology while the leading institutions were the IMF – World Bank combine, the WTO and the OECD.

In Mauritius successive governments since 2000 enthusiastically endorsed the new paradigm, and state activism in the economy became taboo. Labour laws were liberalized and trade unions weakened, protective tariffs for local industries were indistinctively and drastically reduced when not eliminated, and Business Facilitation became the order of the day. Those to whom the electorate had entrusted the mission of “economic planning and management” all but gave up their responsibility by espousing the dominant prevailing neo-liberal free market ideology and substituting as the agents of their new masters.

Indeed to ensure that this whole process would be effectively implemented, an insider from the Washington sisters was brought in as Financial Secretary. The actual form which this new dominant ideology has taken can be summed up under this somewhat mystifying formula euphemistically called “structural adjustment”. This is itself composed of the one-size-fits-all programme imposed on both developing and transitional economies through what is known as the Washington Consensus.

“Structural adjustments” are made up of two sets of policies grouped under the labels of (i) “liberalization” – microeconomic reforms designed to open and free up markets while reducing the role of the State in the economy, and (ii) “stabilization” macroeconomic policies designed to reduce national debt and inflation. After some 15 years of such a regime, which included famously the introduction of the Flat tax, none of the promised results have been achieved. In fact the country has been stagnating in a “middle-income trap” as illustrated by the rates of growth over the past decade or so.

The World Bank and Imf turn leftists?

The political upheavals and rise of populism and extreme right parties in Europe and the US have finally been a wake-up call for all democrats. The extreme levels of inequality of income and wealth (it has been estimated that 1% of the world population captured 80% of the wealth created in 2016) are now generally agreed to be intolerable and the root cause of much of the mayhem. From Pope Francis to Christine Lagarde, words of caution and warning have been issued. So much so that the IMF Fiscal Monitor of October 2017 actually recommends raising taxes in a progressive manner in order to reduce the excessive inequality of income and wealth. There is little evidence, it states, “that progressively increased taxes reduce growth.”

What is perhaps most significant is the recognition by the IMF that its assumption about how the poor would benefit from higher growth through the trickle-down effect is questionable, which is why a progressive form of taxation is required. Recent research by the IMF has also concluded that “substantial income inequality may not only jeopardize progress in education and health, leading even to political unrest, but act as an important drag on long-term economic growth owing to a lower accumulation of human capital and increased financial instability…”

The same cause leading to the same effects, it is no surprise that the above trends with regard to inequality, deterioration of health and education standards, drag on long-term economic growth and even a form of political unrest have manifested themselves over the years. A reversal of these trends can only be achieved if there is a deliberate strategic intent to reverse the policies and economic thinking which have led to our present predicament. Will the next budget signal such a change in direction?

 

* Published in print edition on 23 March 2018

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